The recent financial crisis must be fresh in the minds of the readers.More so in the minds of people who indirectly work for the USA. Everyone knows one thing for sure that the major credit for the spectacular bust goes to the fat cat Wall street bankers.And one would also expect that they believe in the adage- Once bitten twice shy. But not these fat cats.These bankers have pretty much gotten to their business as usual approach of taking undue and unwarranted risks with the money of the investors.
Recently there was news that Goldman Sachs has invested $500 million of its own money and another $1.5 billion from its investors in to facebook valuing it at over $50 billion.Now this is a company that has 2010 revenues between $1.2 -2 billion and close to 500 million users.The net income will be a paltry $350 million.
I will write purely from my own experience of social networking and the capital markets in India.We all saw how people had gone berserk with Orkut some 4-5 years ago.Every tom dick harry was there but now all silent on that front. So that's it.Social sites can never think of competing with google for Internet Ad sales.Everyone knows that the revenue numbers of the Internet business comes from the number of eyeballs these sites attract. But google also serves one very important purpose- that of search.We all know people in general and small businesses will die if not found on Google. So Google is indispensable.But in social networking sites people come only to meet people and not to see ads.There are even options of blocking the ads.
So how much can facebook grow from here.Already the mark of 500 million users is quite huge.And when Goldman has put its money it must be looking at a profit margin of 4-5x.For this type of returns valuation of facebook rises to $250 billion.GAWD!!. Even with current valuation of $50 billion, facebook is worth more than Boeing which is the 100th largest publicly traded company in the world.
To put things in to perspective, the biggest tech success story of the last decade- Google is valued at 7 times its 2010 revenues.If facebook is valued by same multiple, its value comes to a mere $15 billion.To produce the same revenues as google, facebook will have to double its sales revenue for close to 10 years.Now that is a long shot even in the eyes of a unexperienced guy like me. So why did Goldman put that number on facebook?
Then let me tell you that this is what Goldman - the biggest giant of the Wall street does. From whatever i have seen in London is that there is a cut throat competition amongst the investment banks to produce better and newer investment products to produce even better quarterly results.They are always on the look for new investment opportunities and in their enthusiasm put some fancy valuations on companies. With the reputation of Goldman it always finds some gullible people whom it convinces to buy the derivatives that will be made from facebook shares.And then these financial products will be sold globally. And god knows what these will be called- tandoori bonds , junk bonds or liar liar bonds!!
The problem with such valuations is that it pollutes the financial eco-system.With such huge valuations for a 6 year old company, this then becomes a benchmark and the entire cycle of boom-bust again starts. This is exactly what happened in the very recent sub prime valuations.The only different was that fancy valuations were given to real estate market.And the rest ,as they say is history.
This same story is repeated in markets around the world and also in India.We all lost some money in the stock market loss 2 years back .Though the game was at stock market level and not at the corporate level.Thankfully we do not have investment banks in India.Jai ho hamare HDFC aur YES bank ki!!!
Recently there was news that Goldman Sachs has invested $500 million of its own money and another $1.5 billion from its investors in to facebook valuing it at over $50 billion.Now this is a company that has 2010 revenues between $1.2 -2 billion and close to 500 million users.The net income will be a paltry $350 million.
I will write purely from my own experience of social networking and the capital markets in India.We all saw how people had gone berserk with Orkut some 4-5 years ago.Every tom dick harry was there but now all silent on that front. So that's it.Social sites can never think of competing with google for Internet Ad sales.Everyone knows that the revenue numbers of the Internet business comes from the number of eyeballs these sites attract. But google also serves one very important purpose- that of search.We all know people in general and small businesses will die if not found on Google. So Google is indispensable.But in social networking sites people come only to meet people and not to see ads.There are even options of blocking the ads.
So how much can facebook grow from here.Already the mark of 500 million users is quite huge.And when Goldman has put its money it must be looking at a profit margin of 4-5x.For this type of returns valuation of facebook rises to $250 billion.GAWD!!. Even with current valuation of $50 billion, facebook is worth more than Boeing which is the 100th largest publicly traded company in the world.
To put things in to perspective, the biggest tech success story of the last decade- Google is valued at 7 times its 2010 revenues.If facebook is valued by same multiple, its value comes to a mere $15 billion.To produce the same revenues as google, facebook will have to double its sales revenue for close to 10 years.Now that is a long shot even in the eyes of a unexperienced guy like me. So why did Goldman put that number on facebook?
Then let me tell you that this is what Goldman - the biggest giant of the Wall street does. From whatever i have seen in London is that there is a cut throat competition amongst the investment banks to produce better and newer investment products to produce even better quarterly results.They are always on the look for new investment opportunities and in their enthusiasm put some fancy valuations on companies. With the reputation of Goldman it always finds some gullible people whom it convinces to buy the derivatives that will be made from facebook shares.And then these financial products will be sold globally. And god knows what these will be called- tandoori bonds , junk bonds or liar liar bonds!!
The problem with such valuations is that it pollutes the financial eco-system.With such huge valuations for a 6 year old company, this then becomes a benchmark and the entire cycle of boom-bust again starts. This is exactly what happened in the very recent sub prime valuations.The only different was that fancy valuations were given to real estate market.And the rest ,as they say is history.
This same story is repeated in markets around the world and also in India.We all lost some money in the stock market loss 2 years back .Though the game was at stock market level and not at the corporate level.Thankfully we do not have investment banks in India.Jai ho hamare HDFC aur YES bank ki!!!
Quite Realistic....superlike!!! :)
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